Earnings hold the key

Mon, Apr 14 01:00 AM

Last week's events in the US could be very instructive for us. After it's resilient march to 12,600, the Dow has paused and retreated on the back of earnings disappointments.

The entire focus of the US marketso far has revolved aroundcredit market problems and the looming economic recession. It's only in the last week that investors have woken up to the real problem that affects stock prices most: earnings slippages.

It started with Alcoa, then came UPS and on Friday it was the big one, GE, which sent a shiver down the spine of global markets. And this could be just the beginning of the pain for US corporates.

Closer home, we will be faced with the same test, starting this week. While a lot has been said about mark to market losses, those are a one off problem and the market may have priced quite a bit of it in already.

The bigger issue is whether core earnings are reasonably robust and if at the end of April we would still be talking about around 18 per cent earnings growth. If the market gets a sense that earnings growth is about to slow down to sub 15 per cent over the next couple of quarters, there could be another leg down for the market.

Also, while all companies don't give specific annual guidance, one can get a general drift from managements on how they read the pitch for the coming year. If CEOs sound circumspect about FY09, the market will not find the confidence to resume any meaningful uptrend.

While there is a lot of noise around the market these days, the two central risks for the market at this point are earnings downgrades and policy errors, perhaps in that order. If earnings don't slip materially, it's extremely unlikely that we will have a prolonged bear market.

So, through April, keep your eyes peeled on earnings, in India and other markets. Watch out for any early signs of earnings recession in the US, in Asia and of course at home.

If this is just a pause in a global bull market, then earnings will need to hold up, else you can kiss it goodbye for the moment.

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